We recently worked with a national, large-format retailer whose shareholders were not receiving value for the company’s real estate holdings. This is not atypical when the market values an operating enterprise that is not a real estate company.

The solution was to create a private real estate investment trust (REIT) that would hold the real estate assets. Units in the fund would then be sold to investors to a maximum of 49% of the total units. The retailer would retain controlling interest in the fund and would be the asset manager. To avoid potential conflicts of interest we recommended a third party as the property manager.

The end result was that the retailer was able to unlock the value of the real estate, turning a handsome profit in the process as well as generating ongoing asset management, leasing and other fees.

Moreover, the company will use the sale proceeds to acquire and develop other property creating a separate real estate division.

The strategy was simple. Implementation however presented a number of challenges. The three most significant issues were around control, ideology and change management.

The first issue was to create all the new systems, processes and procedures required for an asset management division as compared to those tools the company used for facilities management. This also involved evaluating the existing structure and staff skill set. There is a significant change between being an internally reporting cost center to an externally (investor and tenant) facing profit center and this needs to be managed carefully.

The second issue, in this case, was to deal with favorable internal, real estate related cost allocations to the operating entities. Store managers now had to deal with market lease costs which affected the margins they were evaluated upon. Although it was somewhat “in one pocket and out the other” both the consistency of the revenue from the leases (v. the operating revenues) and the margin on each dollar were better for the company. The company was converting margins on the same dollar of gross revenue. This required the company to change the evaluation process for the operating entities and their staff.

The third challenge was for the company to recognize that 100% control of the real estate was not required. This was overcome with the initial 51% retained control and with keeping the important and strategic asset management functions.

To successfully complete our assignment required a vision and action beyond the dirt and bricks and mortar of real estate to include an evaluation on the entire business and accommodating the sensitivities of all the stakeholders.  

The final chapters in this assignment are yet to be written; however, the company intends on accelerating the growth of it portfolio though the fund, obtain more control over ancillary merchandising through its developments to improve its retail operations and generate significant revenues and returns from what was once it unappreciated real estate holdings.

The Greenstead Group LLC specializes in solving complex real estate issues and improving investor returns. We can help you too. Contact us for a complimentary review of your challenge. Email pmorris@Beyond-the-Building.com

© 2011 Peter D. Morris SCSM, SCMD, CLS

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